How Google Adwords Auctions Work

• Each advertiser sets up a campaign, enters keywords, ads, and bids.
• When a user does a search, Google builds a list of ads that match the search query.
• The list of ads is sorted by bids and quality scores, which are meant to improve the relevance and the “experience” for the user.
• The top ranked ad is displayed in the highest position, the second highest ranked ad gets the second position, and so on.
• If the user clicks on your ad, you are charged a price determined by the bid and Quality Score of the advertiser below you.
• The price charged is the minimum value needed to retain the advertiser’s position in the list.
• Google runs two auctions – one for the top and one for the side. The top quality score ads compete for the top, while the rest compete for the side of the results page.

Google recently put out this outstanding video explaining the process: